August 2023 market commentary

Increased market volatility in August saw the majority of major indices ending the month in negative territory. Investor sentiment was soured by a combination of surging US borrowing costs, rising bond yields in the UK and US, and concerns about economic data from China. Despite a minor rally in equity markets at the end of the month, it wasn’t enough to offset earlier losses – the FTSE 100 ended August at -2.08%, the Euro STOXX 50 finished down 2.45%, and the S&P 500 fell by 1.33%. Even the hitherto buoyant Japanese Nikkei 225 index saw a negative monthly return of 2.5%.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/08/2023 – 31/08/2023).

August markets overview

In the US, headline inflation increased slightly to 3.2% while core inflation decreased to 4.7%. At the annual Jackson Hole Economic Symposium, US Federal Reserve chair Jerome Powell reiterated that the Fed’s inflation target remains at 2%. Powell’s comments were consistent with expectations that the Fed will leave interest rates unchanged at their September sitting, but future rate rises may be considered to help stabilise inflationary pressures in a resurgent economy.

European Central Bank president Christine Lagarde also made it clear that the ECB was sticking to its own 2% inflation target, arguing that increasing it could undermine efforts to anchor expectations. Doubts remain, however, about the ECB’s capacity to deliver and markets are still pricing for an expected inflation overshoot. Eurozone headline inflation held at 5.3% in August while core inflation fell slightly.

Despite increasingly tight monetary policy in the UK, the country’s economy proved more resilient than expected with GDP rising by 0.2% in the second quarter against a consensus prediction of 0%. At its early-August sitting, the Bank of England warned businesses and households that borrowing costs would remain high for at least the next two years but ruled out the likelihood of a recession during that time. Headline inflation fell sharply to 6.8% but remains significantly higher than the Bank’s target rate.

Elsewhere, credit rating agency Fitch downgraded the US government’s rating from AAA to AA+, citing growing government debt and “a steady deterioration in standards of governance over the last 20 years.”

UK prime minister pledges to “max out” North Sea oil and gas opportunities

Speaking at a Shell gas terminal in Scotland, Rishi Sunak unveiled a plan to authorise over 100 new oil and gas drilling licences in the North Sea. The prime minister also indicated he would approve drilling at the controversial Rosebank oilfield, the UK’s largest untapped resource holding around 500 million barrels of oil.

Positioning the plan as a necessary measure to improve domestic energy security and independence, Sunak insisted it would drive down consumer costs, create new jobs, and be compatible with the UK’s net zero strategy. Environmental groups roundly condemned the plan as a “wrecking ball” for the country’s climate and clean energy goals while some Tory MPs echoed criticisms from opposition parties that the government’s proposals were “economically illiterate” and politically tone deaf – even UN secretary general António Guterres weighed in, accusing the prime minister of “moral and economic madness” in pursuing increased fossil fuel extraction.

Investors also expressed concerns about the government's plans, suggesting that recent public statements and policy signals undermined investor confidence in the UK’s progress to net zero and threatened future transformative finance.

The plans announced by Sunak also included additional funding for carbon capture and storage (CCS) facilities in north-east Scotland and Humberside. While CCS is recognised as playing a critical role in most pathways to net zero emissions, concerns have been raised that the UK government is placing too much focus on the technology in order to delay near-term emissions reductions through investment in renewable and low-carbon energy.     

EU hits gas storage target ahead of schedule but remains vulnerable

The EU reached its target to fill natural gas storage facilities to 90% of capacity, over two months ahead of its 1 November deadline.

Responding to the ongoing energy crisis and a significant cut in Russian pipeline supplies, the EU implemented a wide range of measures to stabilise the market and increase energy supply and security through the winter. The commitment made last year by member states to reduce gas demand by at least 15% was extended for another year and the EU Commission spearheaded an international outreach programme for alternative suppliers. The Commission also reiterated its commitment to strengthen the Eurozone’s energy security through continued investments in renewables and energy efficiency.

This investment could be crucial in the long term as the EU’s gas storage capacity isn’t equal to the region’s overall demand. Analysts also warn that a cold winter could lead to increased price volatility and rapid stock depletion which may leave Europe facing another energy shortfall. In addition, expected strike action at major gas exportation sites in Australia is driving up gas prices in Europe and disrupting supply, further highlighting the region’s vulnerability to global energy shocks.

The EU reached its target to fill natural gas storage facilities to 90% of capacity, over two months ahead of its 1 November deadline.

G20 still pouring public funds into “inefficient” fossil fuel subsidies

Though G20 leaders agreed to phase out “inefficient” fossil fuel subsidies two years ago at the COP26 climate summit in Glasgow, a report by the International Institute for Sustainable Development (IISD) showed that the world’s biggest economies continued investing in these subsidies to the tune of $1.4 trillion in 2022. Commitments by the G20 to scale back on fossil fuel subsidies date back to the 2009 Pittsburgh Summit – COP26 was supposed to accelerate that effort.

In February, the International Energy Agency reported that the doubling of subsidy payments in 2022 represented a “worrying sign for energy transitions.” Government spending to reduce energy bills during 2022 is not captured in the data, but the IEA noted such spending was not always well-targeted and had the potential to reduce incentives for energy efficiency measures or to switch to cleaner fuels. 

The IISD called for subsidy reform to be added to the COP28 climate summit agenda in November, recommending that G20 leaders end fossil fuel subsidies in rich countries by 2025, and everywhere else by 2030. The World Bank also recognised the urgent need to cut “politically difficult” subsidies and ensure direct monetary compensation for poorer communities and nations.

Science Based Targets initiative (SBTi) reports sharp rise in corporate target-setting

The SBTi’s 2022 monitoring report published in August saw an 87% increase worldwide in companies and financial institutions setting science-based emissions targets – indeed, more set targets in 2022 than in the previous seven years combined.
The SBTi validated the targets of 1,097 companies in 2022 – by the end of the year, total numbers of companies with or committed to science-based targets represented 34% of the global economy by market capitalisation. Japan had the highest number of companies establishing targets in 2022, followed by the UK and US, and growth in target-setting was observed in every continent for the first time. Total committed annual emissions reductions across science-based targets amounted to 76 million tonnes of CO2.